Remarks of Chairman Timothy Massad before the National Energy Marketers Association
18th Annual National Energy Restructuring Conference
April 30, 2015
As Prepared For Delivery
Thank you for inviting me today, and I thank Craig for that kind introduction. It’s a pleasure to be here.
Let me start with a few words about my background. Then I want to discuss generally what our priorities are and note some actions we are taking that I think will be of particular interest to you.
Before I came to Washington in the spring of 2009, I was a lawyer in private practice for about 25 years. I was a corporate lawyer. I worked on derivatives including helping to draft the original ISDA swap documents. Most of my practice was general corporate and financing transactions including securities. I dealt with a lot of companies in the energy industry, including electric power producers, oil and gas exploration companies and others. One of the fun things about being a corporate lawyer is that you do get to learn about different industries. I often looked forward to due diligence sessions with CEOs and CFOs of the companies we were dealing with. Now of course, I can’t say they enjoyed it, and some of you have probably been on that side of the table, putting up with uninformed questions from a bunch of lawyers and bankers.
My personal history is connected to the energy industry also. My father worked in the oil business for his entire career, first as an engineer following the progress of a well, and ultimately in senior management. My family moved around a lot as he got promoted to many well-known oil towns – Oklahoma City, Midland and Houston, Texas, and Morgan City and Lafayette, Louisiana. Eventually my family moved to Connecticut because he worked in New York.
I don’t think I learned much about the oil industry by virtue of living in those places. But living in various parts of this country – or the world, as I did as an adult, meant I had to make new friends and acquaintances, and deal with people of different backgrounds. And when you do that, you come to appreciate that people can look at things differently. You learn to listen to and respect those who may have a different point of view. Now, of course, if you work in Washington as I do, admitting that others may have a reasonable point of view, even if you don’t agree with it, can be an occupational hazard.
But as a Commission, I think all of us have been doing a lot of listening. Through individual meetings. Through our Commission open meetings and advisory committees. We also read a lot of comment letters. I want to thank the National Energy Marketers Association and its members for their input on our efforts, and I look forward to continuing to work with you.
So I am happy for the opportunity to discuss some of the specific agenda items we are working on, and to hear your thoughts today. Let me start with some general thoughts on where we are since the financial crisis and what are our priorities.
I know all of you appreciate the importance of the derivatives markets. For most Americans, of course, the word “derivatives” is associated with a vague notion of bad behavior by big banks in the global financial crisis. They may not immediately associate the word with a utility company hedging the cost of fuel. Or a manufacturer locking in prices for metal supplies. Or an exporter managing foreign currency risk. But you understand that these markets have become integral to the growth of the global economy by enabling businesses of all types to manage risk.
However, as we learned in the fall of 2008, these markets can create significant risks as well. The build-up of excessive risks that were not well known or understood contributed to the intensity of the global financial crisis – the worst since the Great Depression – one that helped roil our economy and cost eight million Americans their jobs.
And so we are engaged in creating a new regulatory framework for that market, and we have made great progress in doing so. I think we will look back on our current reform effort as we look upon what this country did coming out of the Great Depression to regulate the securities market. Today as then, our goal is to put in place a sensible framework built on the principles of transparency and market integrity.
Part of that challenge is making sure the markets we oversee are serving the needs of participants, especially commercial end-users. We want to do all we can to ensure that these markets are working effectively and efficiently for the many businesses – like yours – that depend on them day in and day out.
Our Priorities and Recent Progress
That is why one of my priorities since taking office has been fine-tuning our rules in a number of areas to address concerns of commercial end-users, and I want to return to that in just a moment to discuss some specifics.
Another has been to make sure that clearinghouses – which we have made more important in this new global framework – don’t themselves become sources of excessive risk. Another is seeking to harmonize rules internationally as much as possible.
And we remain committed to a robust enforcement and compliance program to prevent fraud and manipulation, because there is nothing more important to the integrity of our markets.
Addressing Commercial End-User Concerns
Let me turn to some specifics in these areas, starting with what we have been doing to address the concerns of commercial end-users. We have taken a number of actions already and have others that we are looking at.
Utility Special Entities. We have made it easier for local utility companies to access the energy swaps market. These companies, which keep the lights on in many homes across the country, must access these markets efficiently in order to provide reliable, cost-effective service to their customers. The Commission unanimously approved a change to the swap dealer registration threshold for transactions with special entities which will make that possible.
Customer Protection/Margin Collection. In March, the Commission unanimously approved a final rule to modify one aspect of our customer-protection related rules regarding the deadline for futures commission merchants to post “residual interest,” which, in turn, can affect when customers must post collateral. As a result, the deadline to post residual interest will not move to earlier than 6:00 p.m. the day of settlement without an affirmative Commission action and an opportunity for public comment.
Reporting of Illiquid Swaps. CFTC staff also recently granted relief from the real-time reporting requirements for certain less liquid, long-dated swap contracts. The staff did so because it recognized that in a very illiquid market, immediate reporting can undermine a company’s ability to hedge.
Regional Transmission Organizations. The Commission has previously exempted regional transmission organizations, or “RTOs,” operating pursuant to a FERC tariff from registration and other Commission regulatory requirements. We are presently working on an exemption application submitted by Southwest Power Pool. In the meantime, to facilitate the RTO’s ongoing operation, CFTC staff have provided no-action relief. These organizations operate under a regulatory framework established by the Federal Energy Regulatory Commission (FERC) and engage in transactions that are inextricably linked to the delivery of wholesale energy in their regional markets.
Treasury Affiliates. The Commission staff has also taken action to make sure that end-users can use the Congressional exemptions given to them regarding clearing and swap trading if they enter into swaps through a treasury affiliate.
We have also proposed to modify reporting and record keeping requirements on end-users. And today, I want to announce two further actions we are taking.
Embedded Volumetric Optionality. First, I am pleased to announce that the Commission has this week voted to finalize a proposal we made in November regarding contracts with embedded volumetric optionality – a contractual right to receive more or less of a commodity at the negotiated contract price. Specifically, we proposed to clarify when a contract with embedded volumetric optionality will be excluded from being considered a swap. I know contracts with this feature are important to many of you. We received a number of comments on this and we have incorporated some of the concerns in the final clarification. Once this interpretation is acted upon by the SEC, as definitional issues require actions by both Commissions, we will publicly release the final interpretation. By clarifying how these agreements will be treated for regulatory purposes, the interpretation should make it easier for commercial companies to continue to use these types of contracts in their daily operations.
Trade Options. I am also pleased to announce that the commission voted today to issue a proposed rule revising the rules regarding trade options, which are a subset of commodity options. Specifically, the Commission is proposing to reduce reporting and recordkeeping requirements for trade options, including by eliminating the requirement to file form TO. These products are commonly used by commercial participants, so this action should help those participants continue to do so cost-effectively.
We will continue to look at ways that we can make sure commercial end-users can use these markets effectively and to make sure that the new regulatory framework for swaps does not impose unintended consequences or burdens for them.
Key Priorities Going Forward
Let me turn now to some other current priorities.
Finishing the Remaining Rules
Among the most important is finishing the few remaining rules required under Dodd-Frank for the new swaps regulatory framework. Let me touch on two of these.
Position Limits. An important piece of outstanding Commission business is the position limits rule. Congress mandated that we impose position limits on physical commodities to address the risk of excessive speculation. As you know, the agency reproposed a rule in late 2013. Since that time, we have received and benefited from substantial input during the notice and comment process, including through roundtables and face-to-face meetings. I know that the provisions pertaining to bona fide hedging are an area of keen interest. This is vitally important. We must make sure that market participants can still engage in bona fide hedging. And we appreciate that hedging strategies vary and are often complex. There are many other aspects to this rule that are complex, such as making sure deliverable supply estimates are based on good data. And so we are considering comments carefully and taking the necessary time to get this right.
Margin for Uncleared Swaps Transactions. Another rule we are focused on is the proposed rule on margin for uncleared swaps. This would require swap dealers to post and collect margin from their counterparties on uncleared swaps, much as is required on cleared swaps. Our rule makes clear that swap dealers are not required to collect margin from end-user counterparties, recognizing that the activities of commercial end-users in the derivatives markets do not create the same types or degree of risk as with large financial institutions. But I mention this rule to you because of its importance to reducing risk in our financial system as a whole.
Clearing and Risk
Clearinghouse oversight continues to be a chief priority. In this post-global financial crisis world, clearinghouses play an even more critical role than before. So we need to make sure clearinghouses have strength and resiliency.
We did a major overhaul of our clearinghouse supervisory framework over the last few years. Today we are focused on having strong examination, compliance, and risk surveillance programs. And while our goal is to never get to a situation where recovery or resolution of a clearinghouse must be contemplated, we are working with fellow regulators, domestically and internationally, on the planning for such contingencies, in the event there is ever a problem that makes such actions necessary.
As part of our focus on clearinghouse strength and resiliency, we are also focused on cybersecurity. This applies to key exchanges and other critical infrastructure as well as clearinghouses. We have incorporated cyber concerns into our regulations and made it a priority in our examinations. Our challenge is to leverage our limited resources as effectively as possible. Many major financial institutions are spending far more on cybersecurity than our entire budget. We do not have, for example, the resources to do independent testing. So we have been looking at whether the private companies that run the core infrastructure under our jurisdiction – the major exchanges and clearinghouses for example – are doing adequate testing themselves of their cyber protections, such as control testing, penetration testing and vulnerability testing. Commission staff held a roundtable to discuss this issue last month, and received very useful input. I expect that we will propose a new rule on this subject later this year, which would set forth requirements on testing to insure that best practices are being followed.
As part of our focus on clearing, we have also stepped up our efforts to make sure futures commission merchants safeguard customer funds and meet their financial obligations to clearinghouses. We require FCMs to make daily reports demonstrating compliance with the segregation obligations; and to provide notice to us of certain withdrawals of funds from the customer segregated accounts. Depositaries holding customer funds also are required to confirm balances on a daily basis, so that it is possible to verify that the funds that FCMs report as being held for customers are, in fact, on deposit. And CFTC staff, working with the self-regulatory organizations, conduct periodic on-site examinations of the FCMs to assess their compliance with the financial requirements.
Finally, we continue to prioritize strong enforcement across all the markets we oversee to prevent fraud and manipulation
Last week, the agency along with our colleagues at the Department of Justice, the U.K. Financial Conduct Authority and New York’s Department of Financial Services announced a settlement with Deutsche Bank over charges of manipulating their LIBOR submission. We brought the first case involving LIBOR manipulation in June 2012, and this is the sixth large bank against which we have brought such charges. As you know, LIBOR is used for a wide variety of financial contracts – commercial loans, mortgage loans, interest rate swaps. The process for setting LIBOR was based on submissions by banks, but these banks were changing their submissions in order to benefit their own proprietary positions or protect their reputation. Similarly, a few months ago, we held five banks accountable for their attempts to manipulate foreign exchange benchmarks.
With these actions, the CFTC has imposed over $4 billion in penalties against 13 banks and brokers to address LIBOR and FX benchmark abuses.
Also last week, the Commission and the Department of Justice brought civil and criminal charges against an individual for spoofing in and manipulating, and attempting to manipulate, the E-mini S+P 500 futures contract. Our complaint alleges that one of the days he did so was on May 6, 2010, the day of the flash crash. We believe this individual’s activity contributed to an extreme order imbalance in the E-mini that occurred prior to the commencement of the flash crash. That order imbalance contributed to market conditions that led to the flash crash. We worked closely not only with the Justice Department, but also the FBI, the U.K. Financial Conduct Authority, and Scotland Yard on this case.
I want to note that our enforcement efforts span a wide variety of cases. We have brought a string of cases recently against crooks attempting to defraud retirees through precious metal investment scams, and there are, unfortunately, always those perpetrating Ponzi schemes and other frauds.
As these cases illustrate, we will do everything in our power to pursue those who attempt to engage in fraud or manipulation in our markets. There is nothing more important than the integrity of our markets.
One of the biggest challenges we face is simply that there is more we should be doing. Things like responding quickly to the concerns of market participants. Dealing with the threats posed by cybersecurity, or the challenges of high frequency trading. The CFTC’s current budget has simply not kept up with the growth of the markets and our responsibilities. I remind our staff of the Teddy Roosevelt adage: we will do all we can, with what we have, where we are.
But without additional resources, it is difficult for us to do the job that I believe our markets need and the American people deserve.
The United States has the best derivatives markets in the world – the most dynamic, innovative, competitive, and transparent. They have been an engine of our economic growth and prosperity, in large part because they have attracted participants from around the world and served the needs of end-users who depend on them. I know this group understands the importance of risk management and price discovery more than most. I look forward to working with all of you to make sure that these markets continue to work well for businesses like yours in the years ahead.
Thank you for inviting me. I would be happy to take some questions.
Last Updated: April 30, 2015